Every single financial investment involves some element of risk. Whether it’s a startup stock share, a mutual fund, a new car, or a pack of chewing gum, you always risk losing your investment. (Or just not liking the gum.)
That said, some securities are considered riskier than others. These types of high-risk investments may be so because of how they’re traded or structured. They may deal in high-volatility share prices or unproven commodities. And they’re certainly not for every investor — maybe even most.
But these risky investments get action because they could — in the right situation — make for insanely lucrative returns. Here are five of the more common high-risk, high-reward investment vehicles around today.
Options
Stock options are commonly used vehicles for high-risk/high-reward investments. Many corporations offer stock options to their employees as performance incentives.
A stock option isn’t the same as a stock share, which represents a slice of ownership in a company. Instead, a stock option merely represents the right to buy or sell stock at a listed price before a certain date.
For example, an investor spends $125 on an option to buy 100 shares of Acme Corporation for $15.00 each within one month. They didn’t buy shares — they bought the right to buy shares within 30 days.
Why would the investor want this option, rather than buy shares outright? Suppose Acme’s current stock price is $14.85. The investor could just pick up 100 shares now for $1,485.00. But they may not have the money or time to do that now. And they think Acme is due for a price spike soon.
About a week later, Acme stock hits $18.00. The investor thinks that’s a good sign, and it’s going to go even higher. So they decide to exercise their option and purchase the stock shares. Even though each share is currently worth $18.00, the investor will only pay $15.00 for the shares.
Six months later Acme stock goes crazy, for whatever reason. Shares hit $160 each. The investor sells the 100 shares that they got via their options contract. They earn $16,000 on stock shares they paid $1,500 for only six months ago. So they’ve made $9,775 in total profit ($16,000 gross, minus the $1,500 they spent on shares, minus the $125 they spent on the option).
Options to buy shares are termed “call” options. You can also get options to sell shares at a certain price, called “put” options.
Why are options risky investments? Because they involve a strategy that some analysts get very nervous about: “timing the market.” You’re betting that stock prices will go in a certain direction, and you have to time your transactions perfectly to reap the most reward. And since there’s a deadline involved with an options contract, you may feel coerced to spend more than you want before a certain time.
But options aren’t obligations — they’re just the right. If you don’t exercise the options, you only lose the cost of the premium. That makes them slightly less risky investments than others on this list.
Equity Crowdfunding
Equity crowdfunding is how many businesses get their first taste of operating capital. It works exactly as crowdfunding sites like Kickstarter and GoFundMe do. (It usually uses those sites or others like them.) A new company organizes an online campaign, usually social media, and sells equity to multiple investors.
Equity crowdfunding is considered risky because many of the businesses that use it fail. There’s a perception that businesses launching with venture capital or professional investors are better positioned to succeed. That’s true to an extent. Anyone can get funding, but if they have a poor business plan all the cash in the world won’t matter.
There’s also a higher risk of fraud in equity crowdfunding. This is part and parcel of any online or social media enterprise. But a few startups have given their initial crowdfunders some great returns.
Initial Public Offerings
An initial public offering (IPO) happens when a privately owned company decides to offer shares to public investors for the first time. The company decides what its initial share price will be. Then, having met all the stock exchange requirements and paid the listing fees, they launch an IPO.
Some IPOs are gigantic media events, like Facebook’s in 2012. A few of them can be a little overhyped.
Retail investors have little, if any, opportunities to get in on IPOs. The events are typically reserved for institutional and extremely wealthy investors. That could change if the retail investing class gets bigger and more influential. But for now, only the “big guns” have real chances to buy IPO shares.
IPOs are considered risky investments because they’re not guaranteed to pay off. Facebook, in fact, launched at $38 a share but skidded to less than $18 just four months later. They’ve of course done much better since then. Those who held onto their $38 shares turned a pretty big profit.
But that’s never certain. The first few months after an IPO can be unsettling, especially for startups with bad business plans — and their investors.
Lack of reliable data is another reason IPOs can be risky. Public companies must adhere to certain reporting regulations: They have to issue various financial statements quarterly and annually. Private companies don’t have the obligation to release financial information in public. Investors at their IPOs may therefore not have all the data they need to make a totally informed decision.
Forex Trading
The foreign exchange market, forex for short, establishes currency exchange rates. It’s the most active financial market in the world economy, at least in trading volume. Forex is an “over-the-counter” market, which means transactions happen between brokers and dealers. They don’t occur on stock exchanges. Forex trading is also a 24-hour-a-day market, closing only on weekends.
Forex trading happens between pairs of world currencies. The most common is between the US dollar and the euro. Most trades are done between financial institutions, mainly investment and commercial banks. Relatively few individual investors have managed to get in on the forex market.
Forex trading is a risky investment strategy simply because a country’s currency rate can vary wildly. This can be due to political instability, or weak infrastructures in emerging economies. Interest rates are also subject to fluctuation. There’s also a transactional risk the further away trading partners are from each other. Also, much of the information that’s most valuable in forex trading is controlled by the banks. They don’t let it out. Very seldom does an individual investor have access to it.
Forex trading is dominated by professional investors because, quite frankly, it’s difficult. Institutional forex investors have to factor in a lot of losses in hopes of a single call that can make up for them. Retail investors usually take the opposite approach: small gains in multiple positions, with the fewest losers possible. The disparity in approaches makes forex trading very formidable.
Cryptocurrency
You must have heard something by now about cryptocurrency. You might not, however, understand what investing in it means. We say this only to reassure you that you’re not at all alone.
Cryptocurrency is a payment structure for online commerce. Some companies and businesspersons issue cryptocurrency for the products or services they offer.
Conceptually, cryptocurrency is similar to arcade tokens. Some arcades make their customers buy tokens before they can play video games. Quarters won’t work in their machines. You have to insert a dollar bill into a machine and get four tokens in return.
That’s how cryptocurrency works, pretty much. The reason it’s popular is that it uses very secure blockchain technology.
Like almost every other commodity, you can invest in cryptocurrency. But unlike global paper currency, there are thousands of cryptocurrency “brands.” As of now, two of them dominate the crypto market: Bitcoin and Ethereum. Bitcoin’s market cap is nearing $1 trillion right now; Ethereum’s is about one-quarter that number. No other cryptocurrencies are anywhere close.
Cryptocurrency investing is a risky investment because — well, in a certain way, it doesn’t exist. Its value is, strictly speaking, just a perception at the moment. It only generates value when other investors pay more for it than you did. In that way, it’s similar to paper currency.
Cryptocurrency is the definition of a high-volatility commodity. Bitcoin investors, in particular, have been on a rollercoaster the last few years. As of this moment (March 2021), it’s on the upswing. Not too long ago, its value cratered.
But crypto also has every chance to become the currency of the future. Certainly, it has a lot of support from the online community. Even respected stock advisors are beginning to suggest Bitcoin as a chance investors should take. While a lot of things need to go right for cryptocurrency to go full-on mainstream, it might be a risk worth taking right now.
Gorilla Trades: A Risk Worth Taking
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